WestJet growth plan won't undercut profit, says CEO Saretsky

Gregg Saretsky, WestJet Airlines Ltd. chief executive, shrugged off concerns Tuesday that the carrier’s aggressive growth ambitions would undercut its profit, pointing to the company’s record second-quarter earnings as evidence his plan is working

Gregg Saretsky, WestJet Airlines Ltd. chief executive, shrugged off concerns Tuesday that the carrier’s aggressive growth ambitions would undercut its profit, pointing to the company’s record second-quarter earnings as evidence his plan is working.

Mr. Saretsky said he believed the added seats in its network were allowing WestJet to take advantage of opportunities – including the courting of corporate travellers – it was unable to capitalize upon last year when its planes were flying near capacity.

“I’m making no apologies for the capacity we’re deploying. It’s performing nicely, “ Mr. Saretsky said on a conference call. “We expect to continue to see good results for [the third quarter].

Mr. Saretsky said WestJet’s growth strategy was aimed at narrowing the delta between its market share and that of its rival Air Canada, which currently sits at about 60% of the domestic market, in part by making it more attractive to business travellers.

“There’s an opportunity with our cost structure to fill in times of day to make our schedule have more utility for business travellers,” Mr. Sarestky said.

Chasing market share does, however, mark a bit of a change in strategy at WestJet.

For the past few years, Canadian airlines exercised a level of capacity discipline not seen in the industry, and in turn saw prices and profits steadily increase as well.

That pricing power is, however, being threatened in 2013 as both Air Canada and WestJet ramp up capacity, including through the launch of their low-cost subsidiaries, Rouge and Encore, respectively, this summer.

But Mr. Saretsky said last year’s summer load factors – or the average seats filled on its planes – were ‘unsustainable’ in the mid-80s even though it helped drive prices and profits higher at the airline.

The carrier still delivered a record second-quarter result Tuesday. Its net income rose to $44.7-million, or 34¢ a share, from 31¢ last year and ahead of the 33¢ a share expected by analysts, according to Bloomberg estimates.

But revenue, despite increasing 4.3% year-over-year to $843-million, came in well behind consensus forecasts of $860-million largely due to the negative impact its added capacity was having on fares.

WestJet said its 9.3% capacity growth during the quarter outstripped its 6.3% increase in traffic, and as a result, its unit revenue, as measured by revenue per available seat mile (RASM), fell 4.6% on the back of a 2% slide in yields during the quarter.

WestJet expects a similar slide in RASM in the third quarter as it targets up to a 12% increase in capacity. For the year, the airline said it expected its system-wide capacity to increase by up to 8.5% year-over-year, and a further 4% to 6% in 2014.

But WestJet has also launched a $100-million cost-cutting initiative — up to $75-million of which it hopes to realize next year – to help offset the revenue pressure.

Fadi Chamoun, BMO Capital Markets analyst, said he felt that the quarter could potentially lead to downward revisions of consensus estimates by up to 10%.

“While WestJet’s guidance appears to point to a better cost outlook for the balance of the year, we believe the influx of capacity will continue to put pressure on [revenue per available seat mile] in the Canadian airline industry,” he said.

He said he expected similar pressure on Air Canada when it delivers its second-quarter results next week, albeit more modestly due to its flat load factor.

Mr. Saretsky did, however, acknowledge the airline had made some “big mistakes” in the soft launch of its biggest play for the business traveller in April — its new premium economy seating and fare bundles — by not demarcating the new section or adequately informing passengers about the changes.

As reported last week by the Financial Post, this led to conflict and confusion amongst WestJet’s passengers and flight attendants as customers tried to move into vacant premium economy seats mid-flight, which have more legroom and come with other amenities, like free food and drink and priority boarding for a fee.

“It wasn’t pretty. We apologize to our guests and our flight attendants,” Mr. Sarestky said on the call.

Mr. Saretsky said the mistakes had pushed out the formal launch of the program to Aug. 17 from the start of July, which will mean it will only collect between $20-million and $30-million in additional revenue this year from it, compared to the run rate of $50-million to $80-million it is expected to add annually starting in 2014.

The sections will also be properly demarcated by the August launch, and will be launched alongside an advertising campaign aimed at informing customers.

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